In Part I.i we reviewed the introduction to Bob & Doug’s (& Michael & Shelley’s) classic Straight to the Bottom Line: An Executive’s Roadmap to World Class Supply Management in anticipation of Bob and Bob’s new text on Next Level Supply Management Excellence: Your Straight to the Bottom Line Roadmap which is coming out next month on June 28. Then, in Part I.ii, we reviewed the seven-step process that an organization could follow to get from where it is to where it needs to be. This was followed with a review of some case studies and insights from best in class in Part II. Our last post, Part III.i, covered four of the best practice ABCs that will help an organization get to best-in-class more efficiently while increasing the effectiveness of your Supply Management organization. Today’s post reviews the remaining six ABCs.
Nothing captures the inherent complexity of negotiations management better than this quote straight from the bottom line:
Everyone in the organization has bought things for their personal lives. Whether it’s the CEO, his executive assistant, or the blue-collar guy on the loading dock, everyone buys things every week in their personal lives. And, in fact, most people are very proud of their buying skills. Why not? After all, ever since someone spent his or her first dollar as a young person, that person has done a lot of buying, and they probably believe they do a good job at it. That’s our biggest challenge — everyone sees themselves as a buyer.
This is why it’s challenging, why a buyer needs a strategy, why a buyer has to define a MDO (Most Desired Outcome), a LAA (Least Acceptable Agreement), and a BATNA (Best Alternative To Negotiated Agreement) before starting a negotiation and be prepared to stick to her guns. And she needs to be aware of all of the basic factors that can affect a negotiation — summarized and discussed in the text.
Contract Management goes beyond using a contract management tool to create templates, capture contracts, and track expiration dates to supplier-centric strategies. An organization that does so will not only reduce (contract) creation time, reduce maverick buying, and properly prepare for sourcing efforts, but also optimize the total relationship with its key suppliers through a holistic review of the relationship.
Risk Management is the process of analyzing the possible exposure to loss and reducing loss potential. Proper risk management recognizes that some loss potentials may be avoided, others can be modified to limit their financial consequences, and not all risks must be accepted as they first present themselves. The risks that will be addressed are those with a loss potential that is unpalatable to the organization. The type of mitigation will be dependent on the risk in question, and may take the form of change in sourcing strategy, interest rate hedging, commodity hedging, credit insurance, and/or asset insurance, depending on the risk in question. For detailed examples of market, social, property, casualty, employee, and financial risks and mitigtions, which can be quite complex, see the text.
Consortium Buying / Group Purchasing Organizations
Consortium buying, the process of pooling your needs with those of other companies, is a great idea in theory but, in practice, it generally hasn’t worked. First of all, direct competitors are not good candidates for a consortium due to a natural reluctance to share basic information and best practices with each other. Secondly, most of the initial companies will be at different stages of procurement sophistication and it will be difficult to get all of the companies on the same page. Third, the quality of data available from each company regarding total spend will be vastly different. As a result, most consortia failed. There are some examples to the contrary, including Corporate United, but unless the participants are:
- centralized or center-led
- relatively sophisticated
- from different industries
- from diverse markets
- apples-to-apples with quality spend data
the chances of a consortium working are not very good.
Used equipment dealers seemed to prefer (and be able to afford) new Cadillacs in their line of business. Why? Because, traditionally, when a plant facility had an idle piece of equipment somewhere in the plant, someone in the plant would declare the equipment as “surplus”, it would be subsequently written off for accounting purposes, then stored somewhere and forgotten until it got in someone’s way who would then seek out a scrap dealer who would get the equipment simply by offering an amount close to the scrap or write-off value. In reality, the asset would be worth considerably more, and if the scrap dealer could find another buyer, the scrap dealer would net a very high return.
However, an organization with an effective asset recovery program in place will match unused equipement with needs in other parts of the business and strategically dispose of unneeded assets in profitable used equipment sales.
Business Process Outsourcing (BPO)
Often defined as “the delegation of one or more IT-intensive business processes to an external provider that in turn owns, administers, and manages the selected process based on defined and measurable performance criteria”, the BPO market exceeded 100 Billion in 2004 and may exceed 1 Trillion today. The Procurement BPO market is (significantly) smaller, but if the organization is not up to snuff in certain categories, it might be the better option. The advantages of BPO include rapid cost reduction, the ability to focus scarce resources on strategic catgories, and the ability to upgrade systems and people across the enterprise. The main disadvantage is higher costs and reduced efficiency if done wrong. For an overview of the organizational state required for BPO success, see the text.
Finally, the authors also provide a detailed discussion of when to use a consultant (intelligently).
For more details on the effective use of outsourcing, negotiations management, contract management, risk management, consortium buying, and asset recovery, (re)read Bob & Doug’s (& Michael & Shelley’s) classic Straight to the Bottom Line. It’s packed with insights on every single page. And even though, at five posts, this is SI’s longest book review, it’s only scratched the surface at summarizing the deep and varied insights that can be found in this classic text. When Bob & Doug put pen to paper, not only do they match the insights of Canada’s own Bob and Doug, but the content is so rich that a proper review would be longer than the book itself. So give it a(nother) read. You won’t be disappointed.